ELECTRO INDUSTRIES INC.

Portfolio Analysis

BACKGROUND
Industrial electronic equipment manufacturer. Net worth $35 million (1968). Grew rapidly between 1968 - 1972 fuelled by acquisitions. Acquired rms improved performance resulted in high protability during 1972 - 1974

ACQUISITION STRATEGY
Buy small undercapitalised, high growth rms for cash. Infuse capital by taking signicant amount of debt. More than 2 dozen acquisitions made between 1968 1974. Top performing acquired rms - MOStronics and Jackson Instruments Corp.

OPERATIONS
Seven product groups, operating essentially as autonomous, wholly owned subsidiaries. When new industries were acquired they were merged with one of the seven product groups and accorded divisional status. Corporate operations at Electro were monitoring divisional performance, corporate nancing, longrange planning and acquisitions.

OPERATIONS...

Divisional management were responsible for operations/activities in their divisions. Lead to High turnover resulting in inux of new analytic techniques, different points of view and fresh ideas.

PORTFOLIO
26 operating divisions Inadequate resource to develop all divisions to their potential. No clear basis for decision making Some divisions reporting losses currently, hold signicant potential for growth. Some divisions contributing massive cash currently has relatively low future growth.

PORTFOLIO...
2 level analysis Represent every division corresponding to its prot centers. Prot centers would adequately represent a product as required for further analysis. Within each divisions the products were assessed.

Performance chart were made for all divisions - Sales, Cash ows, Growth rate, Market Share... Conclusion reached, based on charts comparison with main competitors.

MOSTRONICS: A STUDY

Calculator - losing efciency and ignoring distribution. Digital watches - Potential for growth; Marketing is the key. Signicance of MOStronics - Semiconductors, they are supplied to other divisions too.

PRESENT INDICATORS
Major battle expected in Semiconductor market. Signicant price erosion below cost (TI). Remain as MOS component supplier to other Electro divisions. Proceed cautiously into digital watches. Retain calculators.

QUESTION 01

What problems do you think are confronting Electro?

A net loss of $5.7 million on sales of $875 million in 1974. This was the rst loss for the company in 15 years, despite sales growth of 20%. Increased operational expenses as well administrative expenses. Stock price is low from 1968 till 1973. Majority of debt is in short and medium term and the rise of interest rates have led to increased interest expenses ( from 0.54% to 3.66% of total sales) Decentralized structure of operations provides lesser control on the operational efciency at the divisions.

QUESTION 02

What is the corporate cash ow situation?

Overall, from the balance sheet, we can see that the cash available in 1974 is 2.89% of the total sales, which is lower than that of 1973. Only K, N, Q, T, W & X have a increase in their positive cash ows, and U & V have an improvement in their cash ows but it is still negative. All other products have had a decrease in their cash ows in 1974 as compared to 1973. All these have managed to increase their market share, except Q. K, Q, V & W have high market growth rate. N, T & U have medium growth and X has low market growth rate. In 1974, the highest cash ow was seen in products A, B, D, L, N, P, S. All others had a decrease in their cash ow as compared to 1973s cash ows. The lowest cash ow is observed for J, M, U, V, Y and Z.

Product Group
A B D L N P S

Quadrant Changes
Cash Cow Dog
Cash cow, moving into Dog

Market share change

4.8% 26% 1.9% 13.5% 7.7% 3.8% 8.7%

Long term Market Growth

Low (7.5%) Low (7.3%) Very Low (2.8%) Very Low (2.8%) Medium (12%) Medium (9.5%) Medium (12.7%)

Cash Flow
6.3 1.2 1.0 3.7 1.3 1.9 1.0

Cash Cow Star

Cash Cow (borderline with star quadrant)

Question Mark

Product Group
J M U V Y Z

Quadrant Changes
Question Mark Cash Cow Question Mark Question Mark Question Mark Dog

Market share change

29% 8% 6.25% 31% 28% 50%

Long term Market Growth

High (15.5%) Low (6%) Medium (14%) High (20%) Highest (30%) Low (8.7%)

Cash Flow

-1.3 -1.4 -1.5 -1.2 -1.4 -1.0

QUESTION 03

What can we learn from Exhibits 3, 4 and 5?

From Exhibit 3 & 4, we can nd the position and trajectory being followed by each product within Electro Inc. We can classify the products as Cash cow, Dogs, Stars and Question Marks and analyze them accordingly. Based on this analysis, we can decide whether to build the market share, hold the market share, focus on certain segments, abandon the product or divest the entire subsidiary. From Exhibit 5 we can conrm if the suggestions given by Mr. Weatherby are accurate or not. For individual Products, the analysis is as follows:

CASH COW
A, D, E, F, L, M, P
Only M has negative Cash ow which maybe because of the decrease in market share due to some competition. M is still the market leader, and can try and regain market share through Hold strategy, via increased advertising, etc. For A, F, L and P the market share has increased, but the cash ow (even though positive) has decreased from previous year. This may also be because over-investment, which resulted in lower cash ow and small increase of market share. The investments for these products should be limited to maintain their market share. Hold Strategy needs to be employed here. For D & E, the market share has decreased and for them and Build strategy would be required. As they are market leaders, they can lower their prices and regain market share.

DOG
B, C, H, I, T, X, Z
B, T, X & Z have increase in market share due to larger investments and C, H & I have decrease in market share, which implies they have been cash traps. B, T & X have increasing market share and comparatively higher market growth. Hence, they can be divested. C, H & Z have very low cash ow and market share and would require extremely large investments to sustain and no one would buyout the company. But as this is not viable to continue, so they should be harvested to gain short term earnings and eventually abandoned. I has comparatively higher market share, but very low growth rate. So it is best to harvest it for short term gains.

QUESTION MARK
J, K, O, R, S, U, V, W, Y
J, U, V & Y have high growth rates, but negative cash ows. J, U & V have increasing market share also. So for these it is better to adopt a focus strategy is required, concentrating on a few segments only. For Y (MOStronics), focus on Calculators would be better. K & W have high Growth rate and positive cash ows. They need to have build share strategy. O, R & S have medium growth rate and cash ows are decent, so focus strategy is better.

STAR
G, N, Q

G & Q have higher growth rate, but have lost little market share. So Build share strategy is better suited for them. N has lower growth rate and decreased market share, so it better to have hold share strategy.

QUESTION 04

What can we learn from Exhibits 6, 7 and 8?

Exhibit 6 shows that MOStronics has 4.75 % of Calculator market share, while market leader has 33% share. So the relative market share is 0.144 for MOStronics Personal Calculator product. For MOS Circuits, MOStronics has relative market share of only 0.04. From Exhibit 8 we can see that Custom MOS circuits have low market growth rate. Since it has low market share and low market growth rate, it is best to implement harvest strategy to gain short term gains and then eventually abandon it. MOS Digital Logic lays in Question mark quadrant. It has lowest market share as compared to market leader Intel. The net sales of Intel are signicantly higher ($87.5million) than MOStronics ($35 million) and so even if investments were made to increase the market share, it would not sufce. So it is best to divest the product. MOS RAM Memory units have lower market share ($1 million) but higher market growth and overall net sales is lower in this case. To achieve greater market share, MOStronics can try the Build share strategy for this product.

The Personal calculator line has highest market growth and 0.144 relative market share. So MOStronics should denitely try to build share by investing into calculator line. As mentioned there is threat of new entrant, Motorola whose expected output is $100 million. This can prove to be signicant threat to MOStronics as well as Intel in the 4K RAM Memory segment. Also Mr. Whitmans plan to expand into watches will be signicantly challenged by Motorolas entry. As they have higher output, they will be able to beat MOStronics at prices by scale effect The total debt by net worth is least for Electro Inc, at 60% only. So it has scope to look for external funding for its high growth opportunity products.

QUESTION 05

What recommendations would you make as a member of the board:

A) IN TERMS OF FURTHER ANALYSIS

Analysis of the other products of the competitors along with the growth-gain matrix, in order to evaluate the trajectory followed by each product and the strategies employed by the competitors. The analysis of the nancial balance of the strategies employed by Electro Inc. We need to analyze the amount of internal funding generated by the Cash cows, harvested Dogs and Question marks. And we need to nd out the amount of investment required for each product and estimate the overall amount of external funding required to compensate the lack of internal funds.

B) IN TERMS OF SPECIFICATIONS
Build Strategy for D, E, G, K, Q & W Hold Strategy for A, F, L, M, N & P Focus Strategy for J, O, R, S, U, V & Y Harvest Strategy for C, H, I & Z Divest Strategy for B, T & X

THANK YOU

Navanitha Krishna G (MS12A045) Prabakaran S (MS12A056) Roshini Anna John (MS12A068) Santosh JK (MS12A075)